Embargo on Iranian oil: A move to save the US Dollar hegemony

in Economics/International Relations & Defence by

US Dollar Hegemony pictured as a harvester with uncle Sam sitting behind the driving wheel that is on the way to run over the escaping globe @ Dollar Hegemony by Luojie, China Daily, China from www.caglecartoons.com # 85448Acting through its ambassadors, the European Union has announced the imposition of an oil embargo on Iran from July 2012 on as well as placement of sanctions against Iran’s Central Bank, which aim to disrupt the funding of the country’s nuclear programme. But will that suffice? Will it have any effect? Or will it rather be importers bearing the costs? In response to the declaration of the embargo, the Brent price of oil skyrocketed between 23rd and 29th January to $111 per barrel.1 Iran is the second largest producing country in OPEC that supplies 2.5 million barrels per day, out of which 450 thousand are sent to EU countries. If the stoppage of the Iranian supply is not substituted by some alternative source, the embargo on the trading of Iranian oil can significantly harm European economies.

The Oil from Saudi Arabia

Speaking through its Commissioner for Energy Günther Oettinger, the European Union boldly announced that imports from Saudi Arabia will cover the Union’s consumption needs. A difficulty lies in the fact that relying on the oil reserve capacity of Saudi Arabia, which has always played the role of a safety measure, is becoming increasingly problematic. Even a short disruption of the drilling of oil in Algeria, and in Libya during the recent civil war, were sufficient to deplete Saudi reserve capacities.

When Wikileaks published diplomatic cables in 2010, what many analysts had been claiming for some time became public: Saudi Arabia has been lying about its oil reserves. They are lower than it officially claims. As everything indicates, it won’t be in the position to extract more than 12 million barrels a day. Given that the whole world experiences increasing demand, this will push up the prices of black gold to yet unprecedented heights. Oil will keep flowing even without Iran, but then we should not be surprised when the price will jump to somewhere between $120 to $150 per barrel during the summer.

Let’s look at the issue from a different angle. Who can lose out on the disruption of Iranian oil supply is obvious. It won’t be Russia, China, India, nor Turkey, but the European Union. (Allegedly, Japan will only decrease the level of supply.) Iran will now have to sell to these countries for a lower price. Higher prices will be especially beneficial to Saudi Arabia, which needs expensive oil in order to have sufficient funds for bribing its inhabitans, whose uprising would cause a true Arab spring and large problems to the United States, which are publicly supported by the Saudi regime that also allows them to build strategic military bases on its soil.

What really bothers the Americans

According to the treaty between the US and Saudi Arabia from the early 70s, the trading in oil with OPEC is concluded exclusively in US dollars (the famous term „petrodollars“ emerged as the result of the treaty). It is quite simple, really: if you ensure that oil will be traded in US dollars only, the countries needing oil for their economy’s development will be forced to obtain your currency. And this is exactly the reason why the American FED can today print dollar banknotes on big scale.

In the 30 years of functioning of the petrodollar system, the US has run a semi-monetarist trade regime, which has in practice entailed that in exchange for its goods, a country in question has received printed dollars. Besides being highly profitable to the US, the country’s foreign trade could prioritise import over export, leading to a decreased demand for the production of export goods.

This model could predominate only as long as the international political standing of the United States was unshakeable. But as the importance of new seats of power of the East and South increases, the appetite for a new, more just global ordering grows too. Emerging economies that have huge consumption of oil suddenly feel that dollar is detrimental to their growth and want to get rid of it. On the other hand, for the US a breakthrough of euro, juan or yen as the means of exchange would entail that they would have to quickly balance out their trade deficit – and for the largest economic entity in the world this would mean a several years long, painful transition.

When mentioning Iran it is useful to remember the fate of its Iraqi neighbour (indeed, among other countries). Since it is highly interesting that the accusation that Iraq own weapons of mass destruction came few months after Saddam Hussein announced that he will sell oil exclusively in euro. The bizarre leader of Libya, Muammar Kaddafi, was on friendly terms with Western politicians for years and no one was concerned too much by repressions against opposition – not until the moment when he announced the plan to create a pan-African oil trading regime, which hoped to force out the US dollar by creating the “African denari”.

In the past, Iran tried to weaken the dollar’s influence on trade and minimise the dollar transactions made for its oil, and at the end of 2008 it completely succeeded thanks to the founding of the Iranian oil commodity exchange. Japan pays for oil in yens, while others in euro.

To facilitate transactions for oil exports to India, Iran recently concluded a treaty with two important Indian banks. And in order to avoid any disputes with the US, Iran has chosen banks that have no direct engagement with the United States. Russian Gazprombank is expected to play the role of an intermediary. Latest information so far indicate that India has  agreed to this unprecedented deal and thus became the first recipeint of Iranian oil who will pay for the supply in gold instead of by dollar.

If joined by China, this initiative will have yet unforeseeable consequences. Gold once again starts to fulfill the role of currency and the United States watch this development with unease. Since more than by the alleged Iranian nuclear programme, they are threatened by a collapse of the dollar’s hegemony. The explanation for the present war drumming and dispatching of flotillas to the Persian Gulf can thus also be an effort to get rid of the weakest link on the ‘anti-dollar front’ that would send to Russia and China a first, but resounding warning signal.

 

* Translated from Czech by Stanislav Maselnik. Originally published on Revue Politika.

Show 1 footnote

  1. Brent is a trading classification of a kind of crude oil sourced from the North Sea that serves as a major benchmark for petroleum production from Europe, Africa and the Middle East.

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